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Overseas transfers

The world is now very accessible, so increasing numbers of people are travelling and considering relocating for either work or in retirement. As a result, individuals who move overseas may want to take their UK pension benefits with them, rather than leaving them in the UK. Similarly, people coming to the UK may want to bring their overseas pension benefits with them. So it's important to understand what impact this may have on a receiving UK pension scheme.

Transferring UK pension benefits overseas

It's possible, in theory at least, to transfer pension benefits from a UK registered pension scheme to an overseas pension scheme. However, pension scheme trustees and providers won't always give every transfer option that the law allows.

Criteria and process to transfer benefits overseas

Transfers to an overseas pension scheme will be an unauthorised payment (and subject to the relevant tax charges) unless the receiving scheme is a qualifying recognised overseas pension scheme (QROPS). So it's crucial to establish the status of the receiving pension scheme.

Transfers to QROPS must be tested against the member’s overseas transfer allowance (OTA). A 25% overseas transfer charge will apply to any excess over the available OTA.

Regardless of the OTA, an overseas transfer charge will apply unless at least one of a specified list of exclusions applies. More on this later.

It's also important to establish whether the tax authorities in the overseas territory will apply any local tax charges on transfers from UK pension schemes.

Information that UK pension administrators need to transfer benefits overseas

When an overseas transfer request is made, the scheme administrator must, within 30 days, ask the member to provide specific details and acknowledgements.

The member can provide this information (including confirmation that they acknowledge that tax charges might apply) on form APSS263 or in some other written format. This should be provided within 60 days of the transfer request.

Once they've received this, the scheme administrator should check that the overseas scheme meets the conditions to be a QROPS. This should be done no more than the day before the transfer is to be made. If it doesn't qualify as a QROPS, they'll be liable to a scheme sanction charge if the transfer goes ahead, as it would be an unauthorised payment.

In addition to any OTA testing, the administrator must also assess, and deal with, any liability for the overseas transfer charge.

The scheme administrator has a requirement to give details of the transfer to HMRC, the member and the QROPS scheme manager:

• HMRC: Send form APSS262 to HMRC within 60 days. Any overseas transfer charge liability will be reported and paid using the quarterly Accounting For Tax (AFT) process. If the overseas scheme is not a QROPS, the transfer should instead be reported as an unauthorised payment.
• Member: Send details of the transfer, including details of any overseas transfer charge incurred and the amount of OTA used up by the transfer, to the member within 90 days. Where no charge was applied, details of the relevant exclusion condition should also be given.
• Overseas scheme manager: Confirm if the transfer was subject to an overseas transfer charge, and any relevant deduction, to the scheme manager within 31 days. If the transfer was excluded from the charge, the reason for this must also be given.

Qualifying recognised overseas pension schemes (QROPS)

A QROPS is a type of overseas pension scheme to which someone can transfer funds from a UK registered pension scheme without incurring unauthorised payment charges.

The purpose of QROPS, when introduced back in 2006, was to allow individuals moving overseas to be able to take their pension with them. But following years of the rules being manipulated and misused, the Government announced measures in the Spring Budget 2017 which were specifically designed to return the use of QROPS back to what was originally intended.

A UK pension provider must carry out checks on an overseas scheme to clarify that it's a QROPS, rather than just a ROPS, before allowing a member to transfer their funds. In addition, providers now have the extra responsibility for identifying if the overseas transfer charge applies. Where the transfer creates a liability, the provider must adhere to the new administrative requirements associated with this charge.

HMRC require QROPS to provide benefits broadly similar to a UK registered pension scheme.

Requirements to qualify as a QROPS

Firstly, an overseas pension scheme is a recognised overseas pension scheme (ROPS) if it's set up, and regulated and/or recognised for tax purposes, in:

• a member state of the European Economic Area, Norway, Iceland or Liechtenstein, or
• a country or territory (other than New Zealand) with which the UK has a double taxation agreement* containing exchange of information and non-discrimination provisions, or
• any other country or territory (including New Zealand) if the scheme rules dictate that:
  
  
  • retirement benefits can't be paid earlier than would be allowed under a UK registered pension scheme, and
  • residents of the country (or territory) can join the scheme.
  and
• if tax relief in respect of benefits paid from the overseas scheme is available to members who aren't resident in the country or territory in which the scheme is set up, the same (or largely the same) tax relief has to:
  
  
  • also be available to any members who are resident in the country or territory, and
  • apply regardless of whether the member was resident in the country or territory when they joined the scheme or during any period of membership.

A ROPS can become a QROPS if the scheme manager gives HMRC certain assurances, including that the minimum pension age for the scheme is age 55.

The scheme manager must:

• re-notify HMRC generally every 5 years that the scheme is a recognised overseas pension scheme (and supply any evidence required to prove this),
• tell HMRC the name of the country or territory that the scheme is set up in, and
• agree to comply with necessary administrative and reporting requirements - including those relating to the new overseas transfer charge.

While HMRC can refuse to recognise the QROPS, where QROPS status is granted, they will give the scheme a unique reference number.

* High-level details of double taxation agreements are available on HMRC's website.

HMRC produces a list of current ROPS each month, but this only includes overseas schemes that have agreed to have their details published.

Further information on QROPS is available in the Pensions Tax manual.

Overseas transfer allowance (OTA)

With the abolition of the lifetime allowance from 6 April 2024 came the introduction of three new allowances. The lump sum allowance (LSA) and the lump sum and death benefit allowance (LSDBA) limit tax-free lump sums paid from registered pension schemes, while the overseas transfer allowance (OTA) limits how much can be transferred to QROPS without a tax charge.

Transfers to QROPS do not reduce either the LSA or LSDBA.

An individual's OTA is set at the same level as their LSDBA – this means that the OTA is £1,073,100, unless the individual has transitional protection.

If pension benefits have been crystallised before 6 April 2024, the individual's available OTA will be reduced by an amount equal to 100% of the value of their LTA usage.

Any excess over the OTA will be subject to the 25% overseas transfer charge.

Overseas transfer charge

The overseas transfer charge is a 25% tax charge on:

• the excess over the OTA of any transfer to a QROPS, and
• non-excluded transfers from UK relieved pension schemes to QROPS requested after 8 March 2017.

The charge was introduced due to HMRC's increased concern over the numbers of savers getting tax relief in the UK then transferring to a QROPS to secure tax advantages when taking benefits. They were also concerned overseas transfers were being used by pension scammers and pension liberation schemes - as many of these schemes operate in jurisdictions where there's much less regulation than the UK and where high charges and unregulated investment funds are commonplace.

A charge of 25% of the 'transferred value' applies to both 'original' transfers (i.e. the initial transfer from the UK to the QROPS) and 'onward' transfers (i.e. from QROPS schemes). The 'transferred value' makes an allowance for any LTA charge (or overseas transfer charge, where the available OTA was exceeded) that may also have applied. This avoids a double deduction.

Excluded transfers

QROPS transfers will only be excluded from the charge if, at the point of transfer, they meet at least one of these conditions:

• The member resides in the same country or territory as the QROPS is established
• The QROPS is an occupational scheme or an overseas public service pension scheme, with the member joining as an employee
• The QROPS is set up by an international organisation, to provide benefits for current or former employees of that organisation

Before the Autumn Budget on 30 October 2024, there was also an exclusion for transfers to QROPS established within the EEA or Gibraltar, where the member was UK resident or resident in a country within the EEA or Gibraltar. This exclusion has now been removed to reduce the risk of some UK residents benefitting from a double tax-free allowance whilst remaining in the UK - remember that a transfer to a QROPS doesn’t reduce the individual’s LSA or LSDBA. However, the charge won’t apply if the transfer was initiated before 30 April 2024 and completed before 30 April 2025.

Transfers that were requested before 9 March 2017 were automatically excluded from the charge. This excluded status continues to apply to the 'ring-fenced funds' on onward transfers.

The overseas transfer charge can also apply at a later date if the circumstances which made the transfer excluded cease to apply within the relevant period. Where a liability is created by a subsequent event, the charge will be based on the 'ring-fenced' fund value at the date of that subsequent event.

The relevant period: This is the time period, following an original transfer, where the transfer charge may still apply - for example, if the member transferred their benefits to a country outside the EEA. This period is at least 5 years from the date of the original transfer, with the specific length dependant on the date of the transfer:

• Transfers made on 6 April - the relevant period is 5 tax years from date of transfer.
• Transfers not made on 6 April - the relevant period is the remainder of the transfer tax year plus the following 5 tax years.

An onward transfer, made within the relevant period, will not be subject to the charge if either:

• the transfer continues to meet one of the exclusions or
• an overseas transfer charge was previously deducted, in respect of the transferring 'ring-fenced' funds.

The overseas transfer charge will not apply to onward transfers made after the end of the relevant period.

Liability for the overseas transfer charge

This depends on the stage at which the charge arises:

• Initial transfer: Where the charge arises on the initial transfer, the member and the transferring scheme administrator are 'jointly and severally liable'.
• Later events: If a later event creates a charge, the obligation passes to the scheme holding the 'ring-fenced' funds at that time, along with the member.

For further information, GOV.UK has guidance on the overseas transfer charge.

Transferring overseas pension benefits to the UK

Pension transfers to UK registered pension schemes are possible, in theory, from almost any overseas pension scheme. These transfers are not recognised pension transfers, but they're treated in a similar way.

While UK law allows this, pension schemes and products won't always give every possible transfer option. Also, the tax authorities in some countries or regions may not allow transfers to the UK (or, at least, not without tax penalties).

Annual allowance and LSDBA impact

Annual allowance

Transfers of pension benefits into a UK registered scheme from overseas do not count towards the individual's annual allowance.

For members of a UK defined benefit scheme, the overseas transfer value is subtracted from the closing value when calculating the scheme's pension input amount. This ensures the extra benefit accrued from the overseas transfer doesn't count against the annual allowance.

Lump sum and death benefit allowance (LSDBA)

Overseas benefits transferred into a UK registered scheme will be tested against the LSDBA in the usual way when relevant lump sums are paid.

But where the transfer occurred before 6 April 2024, the member can normally claim an increased LSDBA from HMRC if the transfer is made from a ROPS (see the QROPS section above for information on ROPS). The enhancement to the person's LSDBA, based on the amount transferred, is known as a recognised overseas scheme factor.

This enhancement factor does not provide any additional tax-free cash for the member, so the LSA is unaffected.

A claim for an enhancement factor must be made within five years of 31 January following the tax year in which the transfer was made, using HMRC form APSS 202. However, no claims can be made after 5 April 2025, even if the five year period hasn’t expired.

Note: No LSDBA increase can be claimed for:

• any part of the transferred fund that originated from contributions made to an overseas scheme after 5 April 2006 which received UK tax relief or
• transfers from overseas pension schemes that aren't recognised overseas pension schemes.

LSDBA enhancement factor

Calculating the factor

• Before 6 April 2024, the uplift for an enhancement factor was calculated by dividing the extra benefits by the LTA. If the individual had any of the fixed protections or individual protections in place at that time, their protected LTA replaced the standard LTA in the calculation.
• From 6 April 2024, if applying for an enhancement (for a transfer that ocurred before then), the extra benefits should be divided by £1M to calculate the enhancement factor. It appears currently that £1M will be used in all cases, even if the individual has fixed or individual protection.

The answer is rounded up to two decimal places.

Applying the factor

The individual will have their normal LSDBA plus an additional amount calculated by multiplying the factor by the LSDBA. Their LSDBA will simply be calculated as:

LSDBA + (LSDBA x enhancement factor)

Again, the enhancement does not give any additional entitlement to tax-free cash.